MOSCOW (MRC) -- Expectations of a seasonal increase in heating demand have prompted Asian petrochemical makers to buy LPG as cracker feedstock to capitalize on positive olefin margins, though any further purchases could be limited by a rebound in the LPG market led by renewed Chinese and possibly Indian imports, trade sources said S&P Global this week.
In winter, LPG is used for power generation and companies traditionally begin stockpiling from October. But North Asian traders said LPG demand from Japan and South Korea might be muted by current healthy inventory, despite the prevailing front month contango market structure, which would normally encourage stockpiling.
Yet, demand from China's propane dehydrogenation plants have been recovering since the pause, following moves to control the COVID-19 pandemic, while Indian demand could further recover in Q4 due to the Diwali festivities in November.
The market is also monitoring the fluctuating propane discount to naphtha before committing to further purchases of LPG as a substitute cracker feedstock to naphtha.
While the LPG discount threshold to naphtha is normally around USD40-USD50/mt before crackers start to make the switch, the level has been flexible in recent months.
"FEI (The Argus Far East Index) (propane)-MOPJ naphtha is in the USD20s/mt versus USD40s/mt (discount), it has gone up and down. There is also the spot discount as (Taiwan's) Formosa bought H2 September propane at minus USD40s/mt," a naphtha end-user said.
"The LPG market is in a weak situation, which is a good sign for end-users. We are going to use LPG in September, but now it is time to look forward to see if it still works for October, as there will be seasonal stockpiling of LPG prior to winter then -- that is the key factor if end-users can still get a last burst of LPG in that last window," the source added.
A Singapore-based naphtha trader said: "In terms of the number on paper, it does not make sense to put LPG in for cracking now, but some have already committed and have LPG in their cracking feedstock pool... they will not sell the LPG to put in more naphtha, but going forward, they will have to evaluate if its worthwhile to still use LPG."
Despite the lower ethylene margin, market participants said there was still interest from petrochemical makers to use LPG as an alternative feedstock to naphtha.
The Argus FEI propane swap discount to the Mean of Platts Japan naphtha assessments narrowed by USD4.75/mt day on day to USD23.75/mt on Aug. 19, Platts data showed.
"If the difference is more than USD25/mt (lower for LPG versus naphtha), people will still crack LPG because the ethylene and propylene margins are still fantastic, and they can get more ethylene and propylene yield than naphtha," a South Korean naphtha end-user said.
Sentiment for the Asian naphtha complex has been soft in the past two weeks, weighed down by lengthy supply, with cash differentials for spot paraffinic naphtha parcels falling into negative territory against benchmark Mean of Platts Japan naphtha physical, on a CFR Japan basis. The cash differential was assessed at a near four-month low of minus USD5/mt on Aug. 18, and had edged up 25 cents/mt to minus USD4.75/mt at the Aug. 19 close, Platts data showed.
Naphtha traders said the length in naphtha was from a rollover of late-September arrival cargoes of minimum 70% paraffin content naphtha into the H1 October delivery cycle, in addition to more heavy and heavy full-range naphtha grades entering the cracking pool as splitters maximized condensate or light crude on better price economics.
However, availability of high paraffin naphtha - which would produce more olefins - was reduced due to maintenance at Saudi Aramco's Ras Tanura facility, which may prompt petrochemical makers to turn to LPG to maximize olefins production, market sources said.
Ethylene production yield from naphtha is 0.23, while LPG cracking increases it to 0.36-0.40, according to market sources. Propylene production yield from naphtha is at 0.13 compared with 0.18-0.20 from cracking LPG.
A source familiar with the matter said Formosa Petrochemical's import tender for 22,000 mt propane for H2 September delivery, that had attracted around 10 offers, had earlier driven expectations that the discount could sharpen further. But the source said the propane cargo they bought was for use in their refinery system rather than for cracking.
The source added that even after Formosa's No. 3 steam cracker return from maintenance around end-September, it will continue to use naphtha as the main feedstock, or rely on term LPG cargoes.
As MRC reported before, Formosa Petrochemical Corporation (FPCC) has undertaken a planned shutdown at its No.3 cracker in Mailiao. A Polymerupdate source in Taiwan informed that, the company started maintenance at the cracker on August 11, 2020. Located at Mailiao in Taiwan, the No. 3 cracker has an ethylene production capacity of 1.2 million mt/year and propylene production capacity of 600,000 mt/year.
Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).
According to MRC's DataScope report, PE imports to Russia dropped in January-June 2020 by 7% year on year to 328,000 tonnes. High density polyethylene (HDPE) accounted for the main decrease in imports. At the same time, PP imports into Russia rose in the first six months of 2020 by 21% year on year to 105,300 tonnes. Propylene homopolymer (homopolymer PP) accounted for the main increase in imports.